Airline mergers usually don't fly

Published 6:30 am, Sunday, November 18, 2007

Airlines are strange birds, and nowhere is that oddity more apparent than in their mating rituals.

The latest pairing in the aviation mating dance is Delta and United, brought together last week by a New York hedge fund and former Continental chief Gordon Bethune, who now serves as industry matchmaker.

Delta and United stressed that they haven't actually had talks, but Delta said it already had formed a committee to consider its options. United, for its part, has tried everything to find a partner short of speed dating and running an ad in the personals.

So once again, it's that time of year when the turkeys get fat and the airlines get stupid, seduced by Wall Street's whispers of reduced capacity, higher fares and greater efficiency.

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Only later do they remember that airline mergers are akin to a Britney Spears marriage — they end ugly.

Out of almost 20 major acquisitions since deregulation in 1978, industry experts consider only Delta's 1986 purchase of Western Airlines a success.

Morning-after remorse

The rest have been marred by the business equivalent of morning-after remorse, falling victim to runaway costs, dissatisfied passengers and labor disputes, most of which involve combining union seniority lists.

Merger talk has risen anew as the bankruptcy binge of the major carriers — United, Delta, US Airways and Northwest all sought court protection in recent years — made their balance sheets look shiny and clean.

Last year, the target was Continental, which caught United's eye. Then, US Airways, still choking on its merger with America West, decided to make a run at Delta, egged on by Bethune.

The Delta speculation picked up again in late summer, when it named Richard Anderson as its chief executive. Anderson previously worked at Northwest and Continental. To Wall Street, he's Willy Loman with wings.

For its part, Continental can only be hurt by merging. It's spent more than a decade strengthening its balance sheet while assembling a young fleet and a management team that's the envy of rivals. A merger offers it nothing more than someone else's problems.

For the past year, Continental executives have become the industry's Garbo, stressing repeatedly that they want to be alone.

So the Wall Street set, thirsting for fees and quick returns, has moved on. Now it's championing a merger of the willing — Delta and United.

This time, Pardus Capital, the New York hedgie that owns stakes in both carriers, is urging a union. Having sunk money into not one but two major airlines, Pardus now seeks a return by changing the course of the industry. We haven't seen such financial masochism since Warren Buffett bought into USAir.

Pardus, by the way, considered Continental as a target but, as the Chronicle's Bill Hensel reported last week, decided the Houston-based carrier's costs were too high for a merger to work.

Theoretical success

Hedge funds, bankers and sell-side analysts keep insisting on the feasibility of airline mergers. With rising fuel prices, reducing the number of available seats would, in theory, allow airlines to make money.

"With oil at over $90 a barrel, this analysis takes on a heightened importance as we factor those prices into our long-term planning process," Delta's Anderson said in a statement that denied active talks with United and fueled the speculation at the same time.

In other words, this time it will be different.

"Consolidation is needed to de-risk the industry," Pardus President Karim Samii told the Associated Press. I'm not sure what that means, but the track record of airline mergers tells us the only thing riskier than running an airline is merging one.

1 million job cuts

Bethune told the Chronicle that the industry has cut 1 million jobs since deregulation, implying that consolidation would reverse that trend. Thousands of those jobs, though, were pared during the recent bankruptcy binge, setting up the mergers Bethune now craves.

Thousands more were the result of ill-fated mergers of the past. Just ask former TWA employees let go by American after their 2001 joining.

Bethune maintained that only through consolidation can the industry achieve sustained profitability.

We don't necessarily need fewer airlines, we need better ones. Instead, we get what's becoming an annual ritual without regard for history.

When these old birds start their bizarre mating dance, they seem to forget the past. Left without any new ideas in their heads, they simply repeat past mistakes.